Thread: Modern Economics

As a math major, I find the abundant reliance on mathematical models by modern economists absurd. To me it seems that economists suffer from math/physics envy (in that a lot of the mathematical models they use are borrowed from physics with minor adjustments.)

The problem with trying to model a complex system such as the economy - which is comprised of hundreds of millions of participants, all with a mind of their own - is the enormous nonlinearities involved. The nonlinearity translates to significant sensitivity of the output of a certain model to initial inputs. In other words, a small error in the input leads to the rapid evolution towards massively erroneous results. Or in the language of differential equations & dynamical systems, there are huge bifurcations.

The adverse effect of this can generally be minimized when an individual, or even a company, attempts to make decisions based on quantitative methods, because their inputs represent data based on individuals with which they are more intimately related (themselves, their clients, or just a smaller subset of the entire population in general.) What I find troubling is that modern economists are responsible for formulating our economic policy, and they utilize the aforementioned methods by applying them to the entire population in order to maximize overall utility - ie "the greater good."

Empirically, modern economics certainly does not have a very good track record. Perhaps it's time for an evaluation of the field as a whole - a field that has become a joke, to be quite honest.

Originally Posted by Random_Variable

As a math major, I find the abundant reliance on mathematical models by modern economists absurd.

Try here then:

http://www.paecon.net/

Empirically, modern economics certainly does not have a very good track record. Perhaps it's time for an evaluation of the field as a whole - a field that has become a joke, to be quite honest.

Do you have evidence for this? Seems strange to refer to empirics when you present none yourself!

Coincidentally, I was also a math major who studied economics. I can agree, especially after having spent the last 30 years or so observing the often catastrophic applications of economic theory, many based on quite extensive mathematical modelling.

It seems to me that economists, inherently unable to grasp the concept of initial conditions as applied to non-linear systems, tried to ignore the problem completely, despite the fact that this alone made their models useless.
Their adoption of quantification was supposed to help but the exclusion of so many "externalities" which are not economically quantifiable lead to more or less the same result, a set of more statistically rigorous and mathematically intricate but ultimately useless models that only math majors are able to gain the truth of, that they are still just crap.

Some rigour has been introduced into economics over the past few decades but the severe lack of information and the problem of initial conditions has precluded any sort of even semi-accurate medium to large scale modelling. Economic modelling can be compared to modelling the weather but scales of magnitude more data points are needed before any sort of model can even be contemplated, let alone built. Since much of this necessary data is secret, has not even been identified let alone quantified, or exists as unquantifiable "externalities", economists are far behind the meteorologists and climatologists.

Unfortunately, lack of data has never stopped economists from building models and promoting them as infallible policy prescriptions which more often than not lead to economic and social disaster.

I think a fundamental question needs to be answered, and a general agreement arrived at among all people before economics can even begin to be useful.

What purpose does the economy serve?

Originally Posted by unrealist42

Unfortunately, lack of data has never stopped economists from building models and promoting them as infallible policy prescriptions which more often than not lead to economic and social disaster.

Economists would at least combine quantitative and qualitative information in support of their position. Neither of you have bothered. Give me some examples of these models that have led to economic and social disaster?

Originally Posted by Reiver

Economists would at least combine quantitative and qualitative information in support of their position. Neither of you have bothered. Give me some examples of these models that have led to economic and social disaster?

It's not that they necessarily lead to "economic and social disaster" (although there has been absurd legislation & regulation as a result.) It's that they fail to achieve their intended purpose.

If you want a specific example, take the Stochastic Dynamic General Equilibrium model, which is widely utilized by modern economists to try to describe macroeconomic phenomena. This model failed to predict the events of 2007, meanwhile Austrian school economists gave an accurate forecast of the financial crisis based on specific factors - silly legislation such as the CRA, and the expansionary monetary policy of the Fed starting in 2001.

Something I forgot to mention in my first post, is that the underlying assumptions of most models today are based on rational expectations theory and complete markets - both of which are unrealistic. Any model, regardless of how mathematically intricate, will fail to give an acceptable description of the economy in the presence of such laughable assumptions.

It's not called the dismal science for nothing. One thing I've noted about every economist I interact with, is every single one is critical of the field itself. Modeling and econometrics are both valuable, but if you're not incorporating in the human part of the equation your going to make huge mistakes.

an economist use other than math? The problem that I have is the extreme level of simplification. For example, the common argument is that cost goes up when the supply decreases (i.e. demand increases). Why? Most factories are NOT operated at 100 % capacity. Most factories operate at between 75-90 % of capacity. Thus, how does one model human greed if the requisite assumption for the supply-demand relationship is untrue.

Originally Posted by dudeman

For example, the common argument is that cost goes up when the supply decreases (i.e. demand increases).

Eh? You've got that wrong!

The issue with supply/demand is the marginal cost curve. Purely hypothetical (whilst also allowing some theoretical prance with greek letters!)

As far as a specific examples, consider the WTO, World Bank and IMF application of open market theory to Thailand in the 1990s which eventually forced Thailand to rescind capital controls on foreign investment in its real estate market despite warnings from Thai government officials that economic disaster would be an unavoidable consequence.

As a result there was a huge real estate bubble in Thailand which, when it burst in 1997 spread economic calamity across Asia, caused Russia to default, and spread the debt crises as far as Brazil and Mexico which resulted in massive currency devaluations and economic recession.

Since then almost all of the nations effected by this crises and many others have reinstituted currency controls despite WTO rules and pressure from the IMF and others. In other words, they have deemed these free market economists experiments an abject failure.

As investors fled they poured their money into the US and EU which fueled a short speculative boom in tech stocks and then a longer unsustainable boom in the housing markets of the US, UK, Ireland, Spain and elsewhere.

You need more examples of economic disaster caused by failed policy driven by inconsiderate economic theorizing, try Argentina, or Greece, or Ireland, or Iceland, or the US housing market in the 2000s.

Originally Posted by Random_Variable

If you want a specific example, take the Stochastic Dynamic General Equilibrium model, which is widely utilized by modern economists to try to describe macroeconomic phenomena. This model failed to predict the events of 2007, meanwhile Austrian school economists gave an accurate forecast of the financial crisis based on specific factors - silly legislation such as the CRA, and the expansionary monetary policy of the Fed starting in 2001.

Numerous political economic schools of thought predicted the crisis. Neo-liberalism is in itself characterised by greater instability. Seems like you've really just got a problem with neoclassical economics. I wouldn't call that 'modern economics' as economics has shifted towards a more pluralist approach.

Something I forgot to mention in my first post, is that the underlying assumptions of most models today are based on rational expectations theory and complete markets - both of which are unrealistic.

No, only aspects of the models utilise rational expectations (such as the new classicals versus the new keynesians). This isn't a hard-hitting critique. Its purely a "there are some aspects within specific economic models that I don't like".